Insurance resilience improved, but record protection gaps remain: Swiss Re

While insurance resilience against catastrophes, mortality and healthcare related risks has been rising, a record sized protection gap remains, according to insight from global reinsurance firm Swiss Re.

The reinsurer believes the global economy now actually has less capacity to absorb a shock than it did over a decade ago in 2007, with 80% of countries studied showing a lower resilience score in 2018 than in 2007.

Driving this trend has been the exhaustion of monetary policy options across many developed economies, as well as a challenging operating environment for the banking sector, even though financial institutions are considered stronger since the crisis.

Swiss Re’s latest sigma research report looks at the resilience of the global economy today, finding that Switzerland, Canada and the United States have the highest economic resilience, but that Euro area resilience has decreased the most since 2007.

Insurance related resilience of households has risen across the three main areas of risk, natural catastrophes, mortality exposure and healthcare spending.

However, the opportunity for insurance and reinsurance firms around the globe is clear, as even though these three areas show much improved resilience levels, the protection gaps within them are enormous still.

Swiss Re’s sigma study shows that a record-high US $1.2 trillion composite protection gap exists for these three areas of risk.

“It is a trillion-dollar opportunity for the insurance industry,” commented Jerome Jean Haegeli, Group Chief Economist at Swiss Re. “The insurance industry has largely kept pace with growing loss potentials and can do more to improve resilience. Emerging markets, in particular, benefit more strongly from insurance protection than mature economies, which often have greater access to alternative sources of funding.”

Swiss Re’s research, alongside the London School of Economics (LSE), developed Macroeconomic Resilience Indices that attempt to provide a more holistic assessment of economic health than GDP alone.

“Considering the probability of recession in the US next year of 35% and the global ramifications thereof, it is more important than ever to assess the underlying resilience of our economies and look beyond the traditional GDP measures,” Haegeli continued. “In aggregate, policy buffers against economic shocks today are thinner than in 2007. Ultra-accommodative monetary policy over the past years leaves limited future room to maneuver for central banks, while increasing their dependency on financial markets. Coupled with insufficient progress on structural reforms, this is likely to result in more protracted recessions in the future.”

“Progressing and finalizing the European Capital Market Union will be key to improving resilience in the euro area,” Haegeli added. “This would deepen financial markets and diversify the region’s funding sources, taking some pressure off monetary policy. Moving forward with bank consolidation as well as overhauling labour markets are also top priorities.”

Swiss Re also constructed Insurance Resilience Indices, that are based on measures of protection available relative to that needed.

Using these indices, Swiss Re found that the insurance and reinsurance protection gap for the three key risks of catastrophe, mortality and health are particularly significant.

While the insurance protection gap across these areas of risk is at a record $1.2 trillon high globally, Swiss Re said that, in relative terms, resilience has improved in most regions since 2000.

The size of this gap still suggests to us that capital markets support is required by the insurance and reinsurance industry, to be able to make efficient risk transfer more widely affordable and available in an effort to narrow the gaps.

The fact the protection gap has been such a topic of conversation for close to a decade now across the insurance and reinsurance industry, but it continues to widen, suggests the need for a rethink perhaps.

The industry needs to look to how to make its core product of risk transfer more efficient, understandable and accessible, with cost, efficiency, product design and the unbundling of the transaction itself all key to protection gap initiatives, as we explained recently here.

There’s a clear role for collaboration between experts from insurance, reinsurance and ILS markets, with capital market capacity, to re-imagine and re-design the risk transfer offerings that can get quickly to the core of the issues of under-insurance, backed by the most efficient capacity possible.